Tax Implications of R&D Incentives in Small Businesses

Australian Income Tax Law
Name
Institution
Course
Date
1

Introduction
Research and Development (R&D) is a tool that is available for growing and improving
business. It involves looking for market and customer needs and creating new advanced products
and services to satisfy such needs. Any business that has a research and development strategy
has a greater chance of becoming successful than the one that do not have. Research and
development can strategy can result to innovation and improved productivity, which can boost
the business competitiveness. Research and Development (R&D) incentives are government tax
relief credits that are used in rewarding companies for investing in innovation. Such incentives
are used to encourage companies to engage in research and development that benefits Australia
(McKerchar & Hansford, 2012). The government provides a tax offset for the eligible companies
that are involved in R&D activities. The R&D tax incentives aim at increasing competitiveness
and to advance productivity across the Australian economy through industry encouragement to
perform R&D that might not otherwise have been perform. The R&D activities are also meant to
improve the incentives for the small businesses that undertake R&D. R&D tax incentive is
administered by the Australian Tax Office and the Department of Industry, Innovation and
Science. Therefore, this paper intends to discuss Tax implications of R&D incentives in small
businesses.
Research and Development Activities
Research and development activities are the self-assessment actions conducted by
a company to determine if it meets the legibility requirements of such activity. The law requires
that for a company to become legible for R&D incentive, it must have conducted at least one
activity that meets the lawful definition of a core research and development activity. Core
Research and Development (Core R&D) activities contain one hypothesis guided experiment
2

that is carried out to create new knowledge (McKerchar & Hansford, 2012). Other than that,
other activities that cannot get experimented but directly promotes a core R&D activity might be
legible only as supporting R&D activities. The law makes a difference between the core R&D
and supporting R&D activities (Gell & Picone, 2009). To make R&D recognizable as occurring,
there must be an activity or set of connected activities, which satisfies the criterion for core
R&D. After the identification of the core R&D, some of the supporting activities may turn into
R&D activities.
T&D tax incentive keep hold of some elements of the framework for research and
development activities that applies to the R&D Tax Concession that is placed in sections 73B to
&3Z of the Income Tax Assessment Act 1936 (ITAA 1936) (Ryan, 2016). Nevertheless, these
elements have been advanced to in aid of making the new scheme to align better with the
rationale for providing a general subsidy for business research and development. Additionally,
the only R&D activities that are conducted in Australia qualify for the R&D tax incentive. On
the other hand, R&D activities performed outside Australia also qualify only if the Innovation
and Science Australia findings show that the company’s activities meet the regulations set under
section 28D of the Industry Research and Development Act 1986 (SmythN & Lim, 2017). For
Research and development to be legible for the R&D tax incentive, it must be classified as either
Supporting R&D or core R&D activities.
Core R&D activities are referred experimental activities whose end result cannot be
ascertained in advance based on the current knowledge, experience or information, but can only
be ascertained through the application of a systematic progression of a business that;
 is found on the principles of established science; or
 continues from hypothesis to experiment, evaluation, and results to logical conclusions.
3